The true cost of having a company car

by lovemoney staff on 26 September 2012  |  16 comments
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What this employment benefit really costs.

A company car can be a very nice perk of the job, but have you ever thought how much it really costs you? Well, there’s no such thing as a free lunch. And while the benefit is usually paid for by your employer, it will have an impact on your pay packet too.

Unfortunately, non-cash perks such as a company car – or 'benefits-in-kind' as they are otherwise known – are taxable. True to form, HMRC has to take its cut. 

In simple terms, a cash equivalent is calculated for a particular benefit so that it can effectively be treated as extra salary. This amount is then added on top of your normal salary and charged at your highest rate of income tax. 

In other words, if you’re already a higher rate taxpayer, your benefits will be taxable at 40%.

Normally, if you earn £8,500 a year or more – including the cash value of your benefits – or you’re a company director, then you’ll always have to pay tax on any benefits you receive. (There are exceptions – such as living accommodation – which is taxable regardless of your earnings or your role in the company.)

So let’s take a look at how benefit charges are calculated for a company car.

How the benefit charges are calculated

The car benefit charge for a company car is based on the list price of the car including any accessories, its carbon dioxide emissions (calculated using a system known as the appropriate percentage), the type of fuel it uses, whether you pay anything towards the car, and whether it was available for the whole tax year.

This tax year, the appropriate percentage is 15% of the list price for cars with CO2 emissions of 120g/km or less. The charge increases by 1% for each additional full 5g/km up to a maximum charge of 35% for emissions of 235g/km or more*. 

If the car uses diesel there’s a 3% supplement on top. But the maximum charge overall is still 35%.

An example

So in practice this is how it works:

Let’s say the list price for a company car – including accessories – is £21,000, the car has CO2 emissions of 185g/km and it uses petrol. The appropriate percentage will increase by 13% to 28% because it is 65g/km above the 120g/km threshold. Therefore the taxable benefit in this example is £5,880 (£21,000 x 28%).

The actual tax deduction is paid at your highest rate of tax. This means if you’re a basic rate taxpayer the company car will cost you £1,176 (£5,880 x 20%) – or £98 a month – this tax year. Meanwhile, if you’re a higher rate taxpayer, the car will set you back £2,352 or £196 per month at 40% tax.

If the car uses diesel, the taxable benefit will rise to £6,510. The benefits percentage steps up from 28% to 31% with the addition of a 3% diesel supplement. This time a basic rate taxpayer will pay £1,302 (£6,510 x 20%) – or £108.50 per month. Higher rate taxpayers will pay £2,604 (£6,510 x 40%) – or £217 per month.

Bear in mind this possible scenario. You're a basic rate taxpayer but the cash equivalent of the car pushes you into the higher rate tax band. If that happens, part of the calculation will be taxed at 20% and the remainder at 40%.

Contributions and fuel

If you make a capital contribution to the cost of the car – up to a maximum of £5,000 – your tax bill will fall.

Don’t forget, if your employer pays the cost of fuel for private use, it will be treated as a taxable benefit too.

Try this HMRC calculator to work out the tax calculation for your own company car.

*For cars with CO2 emissions of 120g/km or less the taxable benefit is 0% of the list price for cars with zero emissions, 10% for emissions from 76g/km to 99g/km and then an additional 1% per 5g/km over 100g/km

This is a classic lovemoney article that has been updated

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